Oil and natural gas prices reached a “near parity” in 2003, trading at a 6:1 ratio, but the discount grew to a third in 2005, and by the end of the first eight months of this year, the oil-versus-gas discount ballooned to 78%, hitting Canada’s gas industry particularly hard, according to energy consultant Ziff Energy Group.

The difficulties in making money in Canada’s gas fields make it a particularly trying time to revise the royalty regime in Alberta, the most prolific Canadian gas province, said CEO Paul Ziff. An Alberta royalty review panel last week recommended increased levies on natural gas, conventional liquid oil and oilsands production.

The discount between oil and gas prices is “enormous,” said Ziff. The public perceives Western Canada as the heart of the country’s oil and gas industry, but “the reality today is a predominantly natural gas conventional industry, alongside the burgeoning unconventional oilsands industry. In the last several years, gas drilling has accounted for three quarters of conventional drilling activity in Western Canada and no wells for oilsands mining.” (Ziff’s drilling statistics excluded deeper oilsands development, which requires “many fewer wells” for steam-assisted gravity drainage).

However, “in contrast to headlines about crude oil, where international issues are leading to new highs almost weekly, natural gas prices are very low, and remain in serious doldrums,” Ziff said. “The price discount of natural gas from its heating equivalent value to crude oil has steadily eroded gas value and has become worse over the past five years. The gas price is not following the oil price up; consequently, new Western Canada gas-directed activity has dropped sharply, which will lead to a larger drop in gas production next year, due to the high decline rate for Western Canada gas production.”

Western Canadian operators also have faced a significant rise in service costs over the past 30 months, Ziff noted. His company’s research “clearly indicates that Alberta gas economics for new gas activity are at a significant disadvantage compared to most U.S. gas basins. As a result, gas drillers have sharply reduced their once robust activity levels, resulting in many thousands of layoffs in the service industry across Alberta.”

Another worry: the proven gas reserve life in Canada is under nine years and “considerable drilling activity is needed annually to slow the rapid decline,” according to Ziff research.

However, maintaining the existing level of production in Western Canada is unlikely, said Ziff’s Bill Gwozd, vice president of gas consulting. Gwozd said that if gas prices were to become relinked to oil prices, there would be an opportunity for increased gas royalties; however, the timing of increased royalties for the gas sector now would have a “very unfortunate effect on the industry should the recommendations be accepted and implemented.”

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